Stellar Bancorp(US:STEL)2023-11-03 21:12Merger and Acquisition - The merger of Allegiance Bancshares, Inc. and CBTX, Inc. resulted in Stellar Bancorp, Inc. becoming one of the largest banks based in Houston, Texas [130]. - The company recorded $273.6 million of goodwill from the merger, reflecting the fair value of acquired assets and liabilities [139]. - The company completed the final tax returns related to CBTX's business, resulting in an increase of $58 thousand in income tax balances and goodwill [131]. - The merger was accounted for as a reverse merger, with Allegiance as the accounting acquirer and CBTX as the legal acquirer [131]. - The company’s financial results for periods after the merger are not comparable to those prior to the merger due to significant impacts on all aspects of financial statements [132]. - Goodwill increased by $58 thousand during Q3 2023, finalizing all purchase accounting adjustments related to the Merger [145]. - Acquisition and merger-related expenses totaled $3.4 million for Q3 2023, down from $10.6 million in Q3 2022 [154]. - The company engaged an independent third-party service provider for fair value determination as of September 30, 2023, due to a decrease in stock price and market capitalization [147]. Financial Performance - Net income for Q3 2023 was $30.9 million, or $0.58 per diluted share, compared to $14.3 million, or $0.50 per diluted share in Q3 2022, driven by a $46.0 million increase in net interest income [154]. - Net interest income before provision for credit losses for Q3 2023 was $106.7 million, an increase of $46.0 million, or 75.8%, from $60.7 million in Q3 2022, primarily due to the Merger [158]. - Interest income for Q3 2023 was $151.3 million, an increase of $83.4 million, or 122.8%, compared to $67.9 million in Q3 2022, attributed to the Merger and increased interest rates [159]. - Average interest-earning assets increased by $3.37 billion, or 53.3%, for Q3 2023 compared to Q3 2022, primarily due to the increase in loans from the Merger [159]. - Interest expense for Q3 2023 was $44.5 million, an increase of $37.4 million, or 519.4%, compared to $7.2 million in Q3 2022, driven by higher funding costs due to increased interest rates [160]. - Tax equivalent net interest margin for Q3 2023 was 4.37%, an increase of 52 basis points from 3.85% in Q3 2022, primarily due to the Merger and increased yield on interest-earning assets [161]. - Annualized return on average assets for the nine months ended September 30, 2023, was 1.28%, compared to 0.94% for the same period in 2022 [157]. - For the nine months ended September 30, 2023, net interest income before the provision for credit losses was $330.8 million, an increase of $157.5 million, or 90.9%, compared to $173.3 million for the same period in 2022 [166]. - Interest income for the nine months ended September 30, 2023, was $438.6 million, up $247.6 million, or 129.6%, from $191.0 million in the same period of 2022, primarily due to the Merger [167]. - Average interest-earning assets increased by $3.13 billion, or 47.4%, for the nine months ended September 30, 2023, compared to the same period in 2022 [167]. - Interest expense for the nine months ended September 30, 2023, was $107.8 million, an increase of $90.1 million, or 509.8%, compared to $17.7 million for the same period in 2022 [168]. - The tax equivalent net interest margin for the nine months ended September 30, 2023, was 4.55%, an increase of 100 basis points compared to 3.55% for the same period in 2022 [169]. - The average yield on interest-earning assets was 6.02% for the nine months ended September 30, 2023, an increase of 215 basis points over the same period in 2022 [169]. - The company reported a net interest rate spread of 2.97% for the three months ended September 30, 2023, compared to 3.45% for the same period in 2022 [164]. - Net interest income increased by $40.5 million, or 46.0%, for the three months ended September 30, 2023, compared to the same period in 2022, reaching a total of $126.6 million [176]. Credit Losses and Allowances - The provision for credit losses for the three and nine months ended September 30, 2023, was influenced by a less favorable outlook on macroeconomic variables such as interest rates, GDP, and unemployment [138]. - The allowance for credit losses is based on estimates of expected losses in various segments of performing loans, specifically identified losses, and qualitative factors related to economic conditions [134]. - The company’s estimates of credit losses are subject to significant management judgment and may be affected by downturns in loan quality and economic conditions [137]. - Provision for credit losses was recorded at $2.3 million for the three months ended September 30, 2023, compared to $2.0 million for the same period in 2022, reflecting a less favorable macroeconomic outlook [177]. - The allowance for credit losses on loans was $93.6 million, or 1.17% of total loans, as of September 30, 2023, compared to $93.2 million, or 1.20% of total loans, as of December 31, 2022 [210]. - The net charge-offs for all loan types were $8.5 million for the period ending September 30, 2023 [210]. - Nonperforming assets totaled $38.3 million, or 0.48% of total assets, at September 30, 2023, down from $45.0 million, or 0.41% of total assets, at December 31, 2022 [205]. - The allowance for credit losses on unfunded commitments was $10.9 million, down from $12.0 million at December 31, 2022 [212]. Loans and Deposits - Total loans reached $8.00 billion as of September 30, 2023, an increase of $249.8 million, or 3.2%, compared to December 31, 2022 [193]. - The commercial and industrial loan portfolio rose by $18.8 million, or 1.3%, to $1,474.6 million as of September 30, 2023 [195]. - The commercial real estate loan portfolio increased by $145.1 million, or 3.7%, to $4,076.6 million as of September 30, 2023 [197]. - The residential construction loan portfolio increased by $21.4 million, or 8.0%, to $289.6 million as of September 30, 2023 [202]. - The consumer and other loan portfolio increased by $7.1 million, or 15.0%, to $54.6 million as of September 30, 2023 [203]. - The commercial real estate construction and land development loans increased by $40.6 million, or 3.9%, to $1,078.3 million as of September 30, 2023 [199]. - The average loans outstanding were $7,957.9 million for the period ending September 30, 2023 [210]. - Total deposits at September 30, 2023, were $8.69 billion, a decrease of $581.0 million, or 6.3%, from $9.27 billion at December 31, 2022 [222]. - Noninterest-bearing deposits decreased by $573.9 million, or 13.6%, to $3.66 billion at September 30, 2023, compared to $4.23 billion at December 31, 2022 [222]. - Interest-bearing deposits were $5.03 billion at September 30, 2023, a slight decrease of $7.1 million, or 0.1%, from $5.04 billion at December 31, 2022 [222]. - Estimated uninsured deposits totaled $4.73 billion, with uninsured deposits net of collateralized deposits at $3.86 billion, or 44.5% of total deposits [222]. - The total amount of time deposits exceeding the FDIC insurance limit of $250,000 was $560.2 million as of September 30, 2023 [223]. Capital and Funding - Total shareholders' equity increased to $1.46 billion as of September 30, 2023, up from $1.38 billion at December 31, 2022, representing an increase of $77.7 million [247]. - The Bank's total capital to risk-weighted assets ratio was 13.42% as of September 30, 2023, compared to 12.39% at December 31, 2022 [248]. - Common Equity Tier 1 capital to risk-weighted assets ratio improved to 11.14% as of September 30, 2023, from 10.04% at December 31, 2022 [248]. - The Bank's Tier 1 Leverage ratio increased to 9.82% as of September 30, 2023, compared to 8.55% at December 31, 2022 [248]. - The company had a total borrowing capacity of $3.82 billion, with $2.28 billion available and $1.54 billion outstanding in FHLB advances and letters of credit [224]. - The company had $324.0 million of FHLB short-term advances outstanding at a weighted-average rate of 5.62% as of September 30, 2023 [224]. - The company is subject to capital adequacy requirements imposed by the Federal Reserve and FDIC, with a minimum total capital ratio of 8.0% [244]. Interest Rate Risk - Interest rate risk simulations indicated a potential decrease in net interest income of 3.7% with a +300 basis point change in interest rates as of September 30, 2023 [255]. - The economic value of equity could decrease by 6.1% with a +300 basis point change in interest rates as of September 30, 2023 [255]. - During the nine months ended September 30, 2023, there was a decrease in noninterest bearing deposits and certain interest bearing deposits, alongside an increase in loans [256]. - The transition away from LIBOR has been completed successfully [257].